Islamic Banks’ Financial Stability and Its Determinants: a Comparison Study With Conventional Banks in Indonesia

Zulfikar Bagus Pambuko, Nur Ichsan, MB. Hendrie Anto


The research aimed to analyze the stability of Islamic banking industry and its determinants in Indonesia. The same analysis was also done to the conventional banking industry as Indonesia practices dual banking systems. Using monthly data on Indonesian Banking Statistics for 2008-2013, this research implemented the Banking Stability Index (BSI) model for predicting the bank's stability. The analysis began with measuring BSI then using VECM to examine the effect of variables on BSI. The result showed that the BSI of both banking system was exhibiting the moderate level of stability though Islamic banking is more stable and safe way of financing than conventional banking. The shocks of inflation, exchange rate, efficiency, income diversity, liquidity, and Industrial Production Index responded positively by Islamic Bank' stability, while interest rate and market share responded negatively. In another hand, conventional bank' stability responded positively the shock of the exchange rate, income diversity, interest rate, liquidity, and market share, while other variables responded negatively. The results of shocking variables strongly indicated that the conventional banking is more vulnerable than Islamic banking. Islamic banking looked tend to the shock resistance and less volatile. This conclusion, however, might be still questioned as the BSI was not designed specifically for Islamic banking. Therefore, constructing an Islamic BSI (under Islamic banking characters) was important to measure the banking stability more appropriate and to develop a proper early warning system for Islamic banking industry.


Islamic bank; Conventional bank; Banking Stability Index; Dual banking systems; Macroeconomics

Full Text:



Al-Zaabi, O. S. H. (2011). Potential for the application of emerging market Z‐score in UAE Islamic banks. International Journal of Islamic and Middle Eastern Finance and Management, 4(2), 158–173.

Ascarya & D. Yumanita. 2009. Formulasi Stabilitas Sistem Keuangan Ganda di Indonesia. Working Paper, Bank Indonesia.

Chakroun, M. A., & Gallali, M. I. (2015). Islamic Banks and Financial Stability: An Empirical Analysis of the Gulf Countries. International Journal of Business and Commerce, 5(3), 64–87. Retrieved from

Čihák, M., & Hesse, H. (2010). Islamic Banks and Financial Stability: An Empirical Analysis. Journal of Financial Services Research, 38, 95–113.

Ghosh, S. (2011). A simple index of banking fragility: application to Indian data. The Journal of Risk Finance, 12(2), 112–120.

Maechler, A., Mitra, S., & Worrell, D. (2005). Exploring Financial Risks and Vulnerabilities in New and Potential EU Member States. Second Annual DG ECFIN Research Conference:“Financial Stability and the Convergence Process in Europe.” Brussels. Retrieved from

Masood, O., Niazi, G. S. K., & Ahmad, N. (2011). An analysis of the growth and rise of smaller Islamic banks in last decade. Qualitative Research in Financial Markets, 3(2), 105–116.

Mirzaei, A. (2010). The effect of market power on stability and performance of Islamic and conventional banks. Islamic Economic Studies, 18(1), 45–82.

Nuryakin, C., & Warjiyo, P. (2006). Perilaku Penawaran Kredit Bank Di Indonesia : Kasus Pasar Oligopoli Periode Januari 2001-Juli 2005. Buletin Ekonomi Moneter Dan Perbankan, 9(2), 21–56. Retrieved from

Odeduntan, A. K., & Adewale, A. A. (2015). Financial Stability of Islamic Banks: A Review of the Literature. European Journal of Islamic Finance, (2), 1–9.

Rahim, S. R. M., & Zakaria, R. H. (2013). Comparison on Stability Between Islamic and Conventional Banks in Malaysia. Journal of Islamic Economics, Banking, and Finance, 9(3), 131–149.

Shahid, M. A., & Abbas, Z. (2012). Financial stability of Islamic banking in Pakistan: An empirical study. African Journal of Business Management, 6(10), 3706–3714.

Tabash, M. I., & Dhankar, R. S. (2014). The Impact of Global Financial Crisis on the Stability of Islamic Banks : An Empirical Evidence. Journal of Islamic Banking and Finance, 2(1), 367–388.



  • There are currently no refbacks.

Copyright (c) 2018 IQTISHADIA (Journal of Islamic Economics and Business)

Iqtishadia Journal Indexed by :

Creative Commons License
Iqtishadia : Jurnal Kajian Ekonomi dan Bisnis Islam is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

View My Stats