ASSESSING ISLAMIC BANKING STABILITY IN INDONESIA
IN THE NAME OF ALLAH THE MOST
GRACIOUS AND MOST MERCIFUL
ASSESSING ISLAMIC BANKING STABILITY
IN INDONESIA
Dimas Bagus Wiranata Kusuma
Dedy Fahrul Rahman
Muhammad Fikri Maududi
Department of Economics,
International Program For Islamic Economics and Finance (IPIEF)
Universitas Muhammadiyah Yogyakarta
INDONESIA
Paper Presented at “18th Malaysian Finance Association Annual Conference (MFAC2016) and
the 7th Islamic Banking, Accounting, and Finance Conference 2016 (IBAF2016)
BACKGROUND
FIGURE 2. ISLAMIC BANKING DEVELOPMENT IN INDONESIA
TABLE 1 COST RECAPITULATION OF BANKING CRISIS
Country
Spain
United States (Saving and Loans)
Finland
Norway
Sweden
Chile
Mexico
FIGURE 1 COMPOSITION OF ASSETS AMONG FINANCIAL
INSTITUTIONS PER DECEMBER 2014
Indonesia
Korea
Malaysia
Philippines
Thailand
Period
1977-1985
1984-1991
Scandinavia
1991-1993
1987-1989
1991
Latin America
1981-1983
1995
Asia
1997-1998
1997-1998
1997-1998
1981-1987
1997-1998
Cost Recapitulation over GDP
16.8
3.2
8.0
4.0
6.4
41.2
13.5
34.5
24.5
19.5
3.0
34.5
RESEARCH QUESTIONS
How is the level of stability of Islamic banking in Indonesia?
What is the impact of the turmoil of the selected variables on the
stability of Islamic banking in Indonesia?
THEORETICAL AND LITERATURE REVIEW
1.
2.
Theory of financial system stability – The ability of the system to survive from
various shocks that can avoid from a financial crisis
The importance microprudential policy – This policy is intended to maintain the
resilience of individual banks in order to support the stability of banking system
and financial system
3
The need for harmonization between Macroprudential and Macroeconomic
Policy
4
To assess the level of stability in Islamic banking where some financial ratios
are employed by transforming them into weighted index. Several selected
financial ratios represent for the measurement of (1) the pressure of banking
intermediation (Financing to Deposit Ratio), and (2) Resilience of shocks (Non
Performing Financing, and Return On Assets).
DATA AND METHODOLGY
No
Items
1.
Research approach: quantitative time series
2.
Dependent Variables: The Islamic Banking Stability Index (ISPS) -weighted average
index consisting of Non-Performing Financing (NPF), Return on Assets (ROA) and the
Financing of Deposit Ratio (FDR) of Islamic banking
Independent Variable: M2/Reserve Ratio, Inflation, Real Effective Exchange Rate
(REER), Financing Growth.
Method: Logit Model, VAR (Vector Autoregressive)
3.
4.
THE SCHEME ASSESSMENT OF VAR/VECM PROCESS
FINDINGS AND DISCUSSIONS
5
6
Design and Policy Policy Effectiveness
Implementation
Assessment
Planning Process & Implementation of Macroprudential Policy
Instrument of Macroprudential Policy
Element 2
Under or Closer
1
3
4
2
to Threshold
Financial System Risk Identification Risk Assessment Risk Signaling
Surveillance
CMP
Macroprudential ·EWS
Regulator, Public, Crossing
Stress Test
Indicators ·Prompt Indicator
and Market Threshold
·Composite Indicator
Crisis
·Outlook
Element 1
Resolution
Macroprudential Surveillance Process
Normal Condition
Data, Information, and Research
CONVENTIONAL MACROPRUDENTIAL
FRAMEWORK IN INDONESIA
INSTRUMENT
LTV
CBRT
GWM LDR Transp’cy
NOP
CCB
Capital
Surchg.
Liq.- Credit, Gov.- Liquidity- Capital- CapitalCredit-related Credit,
related
related
related
related
related
Single/Multiple Single
Multiple
Single
Single
Single
Single
Broad-based/ Targeted Targeted Broad-based Targeted Broad-based Targeted
Targeted
RULES Fixed/ TimeFixed Time-varying Fixed
Fixed Time-varying Fixed
varying
Rule/
Rule/ Discretion Rule
Rule
Rule
Rule
Discretion Rule
Need Developed to Developed to Need Developed to Developed to
Category of instrument repeated mitigate mitigate repeated mitigate mitigate
calibration systemic risk systemic risk calibration systemic risk systemic risk
Source: Bank Indonesia
OBJECTIVE
MACROPRUDENTIAL POLICY INSTRUMENTS
FINDINGS AND DISCUSSIONS
THE MOVEMENT OF ISLAMIC BANKING STABILITY
INDEX IN INDONESIA
STABILITY INDEX RANGE OF RISK LEVEL IN
ISLAMIC BANKING
Heat Map
Risk Level
Range
Green
Normal
ISPS < -6.98
Yellow
Alert
-6.98 < ISPS < - 6.93
Orange
extra alert
-6.93 < ISPS < - 6.75
Crisis
Red
-6.75 < ISPS < - 6.06
FINANCIAL SYSTEM STABILITY INDEX INDONESIA
MOVEMENTS OF SELECTED MACROECONOMIC
VARIABLES IN INDONESIA OVER 1990-2014
Year
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
PKK
-0.0377
0.03295
-0.0287
0.02885
-0.0999
0.0961
0.00226
-0.0061
0.00457
-0.003
-0.0093
PGK
1.677
4.80093
0.89575
1.21101
1.22504
-0.1635
0.82214
-0.1613
0.93952
1.76902
-0.147
PPK
0.31396
0.86723
-0.2505
1.18474
-2.5352
2.91464
0.6306
0.02869
0.23337
-0.1796
0.39647
PLK
-0.3564
0.50411
-0.1953
0.64013
-1.5135
1.49951
0.2704
-0.0885
0.12223
-0.0489
0.01606
THE PROBABILITY MAGNITUDE OF ISLAMIC
BANKING INSTABILITY IN VARIOUS THRESHOLD
LEVELS IN 2004-2014 (YEARLY BASIS)
1,4
1,2
1
0,8
0,6
0,4
0,2
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
-0,2
-0,4
-0,6
ISPS
M2RES
IFL
GRED
REER
-0,8
IMPULSE RESPONSE FUNCTIONS OF ISPS AGAINTS SOME
SELECTED MACROECONOMIC INDICATORS PRESSURE
IRF
4
8
12
16
20
24
28
30
VARIANCE DECOMPOSITION OF SOME
SELECTED MACROEOKONOMIC
INDICATORS
ISPS
0.9334
1.08326
1.11573
1.13034
1.14202
1.15297
1.16347
1.16857
M2RES
0.14122
0.13864
0.11016
0.07539
0.03807
-0.0006
-0.0398
-0.0595
IFL
-0.0333
-0.0741
-0.109
-0.1412
-0.1711
-0.199
-0.225
-0.2373
GRED
0.05819
0.0485
0.02559
0.00116
-0.0229
-0.0461
-0.0685
-0.0793
REER
-0.0769
-0.1628
-0.2474
-0.3291
-0.4074
-0.4821
-0.5531
-0.5871
VDC
4
8
12
16
20
24
28
30
ISPS
99.2544
98.6431
98.0228
97.449
96.9282
96.458
96.0355
95.841
M2RES
0.01261
0.07041
0.16928
0.28929
0.42212
0.56222
0.70505
0.77631
IFL
0.37153
0.53147
0.63591
0.72113
0.79361
0.85551
0.90826
0.93159
GRED
0.20902
0.21043
0.23126
0.25265
0.27134
0.28722
0.30063
0.30651
REER
0.15245
0.54464
0.94075
1.28791
1.58478
1.83702
2.05061
2.14463
MAGNITUDE AND SOME SELECTED MACROECONOMIC
INDICATORS BASED ON IRF AND VDC TEST
MICROPRUDENSIAL POLICY
PENGGUNAAN DANA
A/D PRIORITAS
SUMBER DANA
iGiro
Cadangan Primer
iTabungan
Cadangan Sekunder
iDeposito
POOL DANA
Pembiayaan
iPinjaman
Investasi
iModal
Aset Tetap
P R O S E S
POOLING APPROACH OF FUNDS
PENGGUNAAN DANA
A/D PRIORITAS
SUMBER DANA
iGiro
Dana Jangka
Pendek
Pembiayaan
Jangka Pendek
Pembiayaan
iDeposito Jangka
Menengah
Dana Jangka
Menengah
Pembiayaan
Jangka Menengah
iPinjaman
Investasi
iDeposito Jangka
Panjang
Dana Jangka
Panjang
Pembiayaan
Jangka Panjang
iModal
Aset Tetap
iGiro
Cadangan Primer
iTabungan
Cadangan Sekunder
iDeposito
P R O S E S
APPROACH TO CONVERSION OF FUNDS
iTabungan
PROSES
ALLOCATION OF FUND APPROACH
CONCLUSIONS AND RECOMMENDATIONS
Conclusions
1. Based on logistic test of various thresholds (Kamisnky, Garcia, Lestano, and Park), we found that there
was very small possibility of pressure from selected macroeconomic variables in providing the possibility of
crisis or instability in Islamic banking
2. Based on VAR/VECM test, it shows that both the response and the contribution of selected
macroeconomic variables are very small in transmitting pressure and contributing to the movement of the
ISPS variable.
3. This paper offers three concepts in enhancing the resilience of the Islamic banking under
microprudential framework; (1) The application of integrated banking models; (2) the development of
pooling of funds concept; and (3) development of allocation of funds concept.
Recommendations
1. Need to develop microprudensial instrument of real sector.
2. It is necessary for developing macroprudential instruments, especially for Islamic banking to mitigate
procyclicality behavior and systemic risk.
E N D OF P R E S E N T A T I O N
THANK YOU FOR YOUR PRECIOUS TIME
MAY ALLAH BLESS US WITH KNOWLEDGE AND WISDOM
WASSALAM
GRACIOUS AND MOST MERCIFUL
ASSESSING ISLAMIC BANKING STABILITY
IN INDONESIA
Dimas Bagus Wiranata Kusuma
Dedy Fahrul Rahman
Muhammad Fikri Maududi
Department of Economics,
International Program For Islamic Economics and Finance (IPIEF)
Universitas Muhammadiyah Yogyakarta
INDONESIA
Paper Presented at “18th Malaysian Finance Association Annual Conference (MFAC2016) and
the 7th Islamic Banking, Accounting, and Finance Conference 2016 (IBAF2016)
BACKGROUND
FIGURE 2. ISLAMIC BANKING DEVELOPMENT IN INDONESIA
TABLE 1 COST RECAPITULATION OF BANKING CRISIS
Country
Spain
United States (Saving and Loans)
Finland
Norway
Sweden
Chile
Mexico
FIGURE 1 COMPOSITION OF ASSETS AMONG FINANCIAL
INSTITUTIONS PER DECEMBER 2014
Indonesia
Korea
Malaysia
Philippines
Thailand
Period
1977-1985
1984-1991
Scandinavia
1991-1993
1987-1989
1991
Latin America
1981-1983
1995
Asia
1997-1998
1997-1998
1997-1998
1981-1987
1997-1998
Cost Recapitulation over GDP
16.8
3.2
8.0
4.0
6.4
41.2
13.5
34.5
24.5
19.5
3.0
34.5
RESEARCH QUESTIONS
How is the level of stability of Islamic banking in Indonesia?
What is the impact of the turmoil of the selected variables on the
stability of Islamic banking in Indonesia?
THEORETICAL AND LITERATURE REVIEW
1.
2.
Theory of financial system stability – The ability of the system to survive from
various shocks that can avoid from a financial crisis
The importance microprudential policy – This policy is intended to maintain the
resilience of individual banks in order to support the stability of banking system
and financial system
3
The need for harmonization between Macroprudential and Macroeconomic
Policy
4
To assess the level of stability in Islamic banking where some financial ratios
are employed by transforming them into weighted index. Several selected
financial ratios represent for the measurement of (1) the pressure of banking
intermediation (Financing to Deposit Ratio), and (2) Resilience of shocks (Non
Performing Financing, and Return On Assets).
DATA AND METHODOLGY
No
Items
1.
Research approach: quantitative time series
2.
Dependent Variables: The Islamic Banking Stability Index (ISPS) -weighted average
index consisting of Non-Performing Financing (NPF), Return on Assets (ROA) and the
Financing of Deposit Ratio (FDR) of Islamic banking
Independent Variable: M2/Reserve Ratio, Inflation, Real Effective Exchange Rate
(REER), Financing Growth.
Method: Logit Model, VAR (Vector Autoregressive)
3.
4.
THE SCHEME ASSESSMENT OF VAR/VECM PROCESS
FINDINGS AND DISCUSSIONS
5
6
Design and Policy Policy Effectiveness
Implementation
Assessment
Planning Process & Implementation of Macroprudential Policy
Instrument of Macroprudential Policy
Element 2
Under or Closer
1
3
4
2
to Threshold
Financial System Risk Identification Risk Assessment Risk Signaling
Surveillance
CMP
Macroprudential ·EWS
Regulator, Public, Crossing
Stress Test
Indicators ·Prompt Indicator
and Market Threshold
·Composite Indicator
Crisis
·Outlook
Element 1
Resolution
Macroprudential Surveillance Process
Normal Condition
Data, Information, and Research
CONVENTIONAL MACROPRUDENTIAL
FRAMEWORK IN INDONESIA
INSTRUMENT
LTV
CBRT
GWM LDR Transp’cy
NOP
CCB
Capital
Surchg.
Liq.- Credit, Gov.- Liquidity- Capital- CapitalCredit-related Credit,
related
related
related
related
related
Single/Multiple Single
Multiple
Single
Single
Single
Single
Broad-based/ Targeted Targeted Broad-based Targeted Broad-based Targeted
Targeted
RULES Fixed/ TimeFixed Time-varying Fixed
Fixed Time-varying Fixed
varying
Rule/
Rule/ Discretion Rule
Rule
Rule
Rule
Discretion Rule
Need Developed to Developed to Need Developed to Developed to
Category of instrument repeated mitigate mitigate repeated mitigate mitigate
calibration systemic risk systemic risk calibration systemic risk systemic risk
Source: Bank Indonesia
OBJECTIVE
MACROPRUDENTIAL POLICY INSTRUMENTS
FINDINGS AND DISCUSSIONS
THE MOVEMENT OF ISLAMIC BANKING STABILITY
INDEX IN INDONESIA
STABILITY INDEX RANGE OF RISK LEVEL IN
ISLAMIC BANKING
Heat Map
Risk Level
Range
Green
Normal
ISPS < -6.98
Yellow
Alert
-6.98 < ISPS < - 6.93
Orange
extra alert
-6.93 < ISPS < - 6.75
Crisis
Red
-6.75 < ISPS < - 6.06
FINANCIAL SYSTEM STABILITY INDEX INDONESIA
MOVEMENTS OF SELECTED MACROECONOMIC
VARIABLES IN INDONESIA OVER 1990-2014
Year
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
PKK
-0.0377
0.03295
-0.0287
0.02885
-0.0999
0.0961
0.00226
-0.0061
0.00457
-0.003
-0.0093
PGK
1.677
4.80093
0.89575
1.21101
1.22504
-0.1635
0.82214
-0.1613
0.93952
1.76902
-0.147
PPK
0.31396
0.86723
-0.2505
1.18474
-2.5352
2.91464
0.6306
0.02869
0.23337
-0.1796
0.39647
PLK
-0.3564
0.50411
-0.1953
0.64013
-1.5135
1.49951
0.2704
-0.0885
0.12223
-0.0489
0.01606
THE PROBABILITY MAGNITUDE OF ISLAMIC
BANKING INSTABILITY IN VARIOUS THRESHOLD
LEVELS IN 2004-2014 (YEARLY BASIS)
1,4
1,2
1
0,8
0,6
0,4
0,2
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
-0,2
-0,4
-0,6
ISPS
M2RES
IFL
GRED
REER
-0,8
IMPULSE RESPONSE FUNCTIONS OF ISPS AGAINTS SOME
SELECTED MACROECONOMIC INDICATORS PRESSURE
IRF
4
8
12
16
20
24
28
30
VARIANCE DECOMPOSITION OF SOME
SELECTED MACROEOKONOMIC
INDICATORS
ISPS
0.9334
1.08326
1.11573
1.13034
1.14202
1.15297
1.16347
1.16857
M2RES
0.14122
0.13864
0.11016
0.07539
0.03807
-0.0006
-0.0398
-0.0595
IFL
-0.0333
-0.0741
-0.109
-0.1412
-0.1711
-0.199
-0.225
-0.2373
GRED
0.05819
0.0485
0.02559
0.00116
-0.0229
-0.0461
-0.0685
-0.0793
REER
-0.0769
-0.1628
-0.2474
-0.3291
-0.4074
-0.4821
-0.5531
-0.5871
VDC
4
8
12
16
20
24
28
30
ISPS
99.2544
98.6431
98.0228
97.449
96.9282
96.458
96.0355
95.841
M2RES
0.01261
0.07041
0.16928
0.28929
0.42212
0.56222
0.70505
0.77631
IFL
0.37153
0.53147
0.63591
0.72113
0.79361
0.85551
0.90826
0.93159
GRED
0.20902
0.21043
0.23126
0.25265
0.27134
0.28722
0.30063
0.30651
REER
0.15245
0.54464
0.94075
1.28791
1.58478
1.83702
2.05061
2.14463
MAGNITUDE AND SOME SELECTED MACROECONOMIC
INDICATORS BASED ON IRF AND VDC TEST
MICROPRUDENSIAL POLICY
PENGGUNAAN DANA
A/D PRIORITAS
SUMBER DANA
iGiro
Cadangan Primer
iTabungan
Cadangan Sekunder
iDeposito
POOL DANA
Pembiayaan
iPinjaman
Investasi
iModal
Aset Tetap
P R O S E S
POOLING APPROACH OF FUNDS
PENGGUNAAN DANA
A/D PRIORITAS
SUMBER DANA
iGiro
Dana Jangka
Pendek
Pembiayaan
Jangka Pendek
Pembiayaan
iDeposito Jangka
Menengah
Dana Jangka
Menengah
Pembiayaan
Jangka Menengah
iPinjaman
Investasi
iDeposito Jangka
Panjang
Dana Jangka
Panjang
Pembiayaan
Jangka Panjang
iModal
Aset Tetap
iGiro
Cadangan Primer
iTabungan
Cadangan Sekunder
iDeposito
P R O S E S
APPROACH TO CONVERSION OF FUNDS
iTabungan
PROSES
ALLOCATION OF FUND APPROACH
CONCLUSIONS AND RECOMMENDATIONS
Conclusions
1. Based on logistic test of various thresholds (Kamisnky, Garcia, Lestano, and Park), we found that there
was very small possibility of pressure from selected macroeconomic variables in providing the possibility of
crisis or instability in Islamic banking
2. Based on VAR/VECM test, it shows that both the response and the contribution of selected
macroeconomic variables are very small in transmitting pressure and contributing to the movement of the
ISPS variable.
3. This paper offers three concepts in enhancing the resilience of the Islamic banking under
microprudential framework; (1) The application of integrated banking models; (2) the development of
pooling of funds concept; and (3) development of allocation of funds concept.
Recommendations
1. Need to develop microprudensial instrument of real sector.
2. It is necessary for developing macroprudential instruments, especially for Islamic banking to mitigate
procyclicality behavior and systemic risk.
E N D OF P R E S E N T A T I O N
THANK YOU FOR YOUR PRECIOUS TIME
MAY ALLAH BLESS US WITH KNOWLEDGE AND WISDOM
WASSALAM