Analyzing Empirical determinants into growing Islamic banks in Indonesia.
Disusun Oleh:
Bassem M. I. Ismail: NIM. 041714203044
PROGRAM STUDI MAGISTER AKUNTANSI
FAKULTAS EKONOMI DAN BISNIS
UNIVERSITAS AIRLANGGA
SURABAYA
2017
Table of Contents:
Chapter I – INTRODUCTION
1.1 Background
1.2 Statement of Problem
1.3 Purpose or benefits of the research
1.4 Research objectives
1.5 Uniqueness for this study
Chapter II – REVIEW OF THE LITERATURE AND THEORIES.
2.1 Theories of this research
2.3 Hypothesis development.
Chapter III – METHODOLOG
3.1 Research Approach
3.2 Type and Source of Data Collection
3.3 Operational Definition and Variable Measurement
3.3.1 Dependent Variable
3.3.2 Independent Variable 3.4 Population and research sample 3.5 Research design 3.6 Technical Analysis for the data
Chapter I
INTRODUCTION
1.1 Background
In Islamic countries, many of them poor and not highly developed, large parts of the Muslim population do not have access to adequate banking services often because devout Muslims are unwilling to put their savings into a traditional financial system that runs counter to their religious values. Islamic banks (IBs ) seek to provide financial services in a way that is compatible with Islamic teaching, and if Islamic banks can tap that potential Muslim clientele, that could hasten economic development in these countries. (Imam & Kpodar, 2016).The effect of financial crisis insinuated banks and other financial institutions to focus on long-term sustainability rather than short-term profitability attainment.(Banerjee & Velamuri, 2015) The institutional scholars are concerned with the long-term viability and survival of the institutions via financial and operational sufficiency(Cull, Demirgu¨ç-Kunt, & Morduch, 2007) Five decades ago, Islamic banking emerged on a modest scale in the 1960s in Egypt, to fill a gap in a banking system not attuned to the needs of the devout. The expansion of Islamic banking across the globe has been rampant since its birth, particularly over the last two decades. As illustrated by (Imam & Kpodar, 2013).
The market share of Islamic banking is still small in the global financial sector; however, it is growing fast in many countries, especially in the Middle East and Asian regions. (International Monetary Fund, 2015) .However, do these findings has been found that financial sector deepening affecting growth also apply to systems where Islamic banking plays a significant role? Is the development of Islamic banking beneficial to economic 2growth in other words? This is an important question to answer, as Islamic banking has unique characteristics that differ from conventional banking; they appear better adapted to characteristics prevailing in poorer countries of the Middle East, sub-Saharan Africa, and Asia. This paper is not attempting to answer the question of whether the development of Islamic banking would contribute more to financial sector development than conventional banks, an altogether different question.
It is simply asking the question of whether Islamic banking is good for growth The strength and financial health of the Islamic banks of Pakistan was analyzed by using “COSGI model” (Capital, Operating efficiency ,Size , Gross domestic product ,Inflation )
In addition ,with a few exceptions, countries with large Islamic populations often Low-income countries (see Fig. 1) which is one of the causes of an underdeveloped financial system.
(Alesina, Devleeschauwer, Easterly, Kurlat, & Wacziarg, 2003). This paper presents background information on the Islamic banking system and a review of the literature in Sections II and III, respectively.
1. GDP per capita and Muslim population share (19902010).Sources: IMF, Alesina et al. (2003)
It accommodates the needs of customers who need interest free products and services based on shariah laws. Scholars and banking practice observers confident that this type of banking system can be such an alternative way of escaping from the economic crises.This point of view was successfully tested and proved to be true.When the monetary crises heavily hit Indonesia in the 1997/98 period, many conventional banks failed and liquidated, banks which applying shariah law were surviving and have little or were not affected by the crises and have a faster recovery than that of conventional banks. For example, after the crises the Non-Performing Financing (NPF) of the Islamic banks is far below than that of conventional banks (NPL). In 2000 the NPF of the Islamic banks is 12.96 percent, while the NPF of conventional banks was 26.77 percent.This indicates that Islamic banks face less risk compared to conventional banks (Viverita, 2011).
Islamic Banking as part of the national banking, Islamic banking is also required to be able to channel financing at reasonable rates. Current tariff perceived financing in Islamic banks is still quite high when compared to conventional bank lending rates. Higher pricing in Islamic bank is not independent of its unique operational in Islamic banking.From a financial perspective, the lower BI rate will trigger a decline in interest rates, so the margin will be increasingly competitive Islamic banks. However, determination of pricing in Islamic banks is also based on the analysis of various risk factors, which is somewhat different from conventional banks.Distribution of Islamic bank financing will always be based on analysis of risks that arise. (Sudarwanto, 2011).
Currently these products are channeled financing by Islamic banks can be grouped into two types. First, the financing that will provide certainty of payment for Islamic banks, both in terms of quantity and time. Second, the financing does not provide certainty of income for Islamic banks, in terms of quantity and time. The level of revenue would be positive, zero, or even negative. Given the characteristics of the two groups are different contract, then the financial risk analysis of the two groups were also different (Sudarwanto, 2011)
1.2 Statement of Problem for this research.
The last recent crises make the business environment unstable around the world and lacking in the financial capabilities, in the other side Islamic banks more resistant and less influence front these crisis. In Islamic economic system, profit taking is considered lawful as is the private ownership as in capitalism. However, in capitalism, profit taking and private ownership are based on the use of unrestrained economic decision-making power. (Ramzan, 2012) So, the aim for this study to analysis an effort has been made to prove whether the IB is growing and should be bigger in Indonesia or not?
1.3 The purpose and benefits for this study.
The aim for this study to bring more evidences and extend the recent research to show the benefits from growing Islamic banks. In addition to fill this gap in the literature. Specifically, this paper uses data from Bankscope and the World Bank to empirically test which factors (such as Capital asset, , Operating efficiency ,Size ,and macroeconomics factors such as Gross domestic product ,Inflation ).the competitive advantage if the smaller bank being bigger and expand the current number of Islamic banks in order to increase the total capital .furthermore if the empirical result in Asia has been shown positive findings that is good indicators to establish more Sharia banks specially in some countries like Indonesia and Malaysia because they will not face limitations for adopt sharia perspective in the same time the result will be valuable to affect many indicators.
1.4 Objectives of this research.
The aim of this study is to look into the achievements and growth of the Islamic banking in Indonesia based on Shariah principles and their applications and finally to analyze the outcomes in the shape of Economic growth increased profits, assets,moreover this study can be achieve the following objectives:
1. Critically evaluate the outcomes of the impact of application of different Shariah Principles on the basis of “COSGI model “(Capital, Operating efficiency ,Size , Gross domestic product ,Inflation ).
2. Identify the important aspects of the expansion of Islamic banks.
3. Identify the future dimensions of the size of Islamic banks.
4. Identify the interrelationship between large and competitive Islamic banks with conventional banks.
1.5 Uniqueness of this study.
This study will be happened in Indonesia or in one of the big cities like Jakarta or Surabaya. Indonesia has big economic and apart of G20 in the world and has a lot of Islamic banks around the cities , second thing is this study focus on the relationship between growing Islamic banks and competitiveness globally, thirdly outline the effect of Islamic perspective sharia on liquidity and profitability .
CHAPTER II
Literature review
2.1 Theoretical Background
2.1.1 Endogenous Growth Theory
Endogenous Growth Theory or new growth theory was developed in the 1980‟s by Romer, Lucas and Rebelo, among other economists as a response to criticism of the neo-classical growth model. The endogenous growth theory holds that policy measures can have an impact on the long-run growth rate of an economy (Yakubu and Affoi, 2014). The growth model is one in which the long-run growth rate is determined by variables within the model, not an exogenous rate of technological progress as in a neo-classical growth model. Jhingan (2006) explained that the endogenous growth model emphasizes technical progress resulting from the rate of investment, the size of the capital stock of human capital. In an endogenous growth model, Nnanna et al. (2004) observed that financial development can affect growth in three ways, which are: raising the efficiency of financial intermediation, increasing the social marginal productivity of capital and influencing the private savings rate. This means that a financial institution can effect economic growth by efficiently carrying out its functions, among which is the provision of financial services which leads to bank profitability.
2.1.2 Agency theory
The relationship between finance and growth has been focused on by cross-country empirical studies because of the lack of time series data in the context of developing nations (Ang & McKibbin, 2007; McCaig & Stengos, 2005).Agency theory sees managers and employees as agents whose interests may diverge from those of their principal (Jensen and Meckling 1976).In addition to a normal agency relationship that involves the separation and ownership and control of the shareholder and normal agency problems face by the bank, the additional agency relationship in IFIs is the need to comply with Shari’ah and separation of cash flow rights from the rights to control the investments by the IAH in Islamic banks (Safieddine 2009).
Bank size and its relation to financial stability is an issue that has taken a central stage in academic and policy debate especially since the eruption of the global financial crisis. Associating large banks with excessive risk taking and morally hazardous behavior, some cite large or “too big to fail” banks to be at the root of the recent crisis and, for economic stability .(Ibrahim & Rizvi, 2017).An Islamic bank refers to a system of banks or bank activity that follows the principles of the Sharia (Islamic rulings) and its practical application through the development of Islamic economics. The principles that emphasize moral and ethical values in all dealings have wide universal appeal. Sharia prohibits the payment or acceptance of interest charges for the lending and accepting of money, as well as carrying out trade and other activities that provide goods or services considered contrary to its principles. In the context of banking system, Islamic banks are important institutions.
These banks contribute fundamentally to financial growth in many countries. The number of Islamic financial institutions worldwide has risen from one institution in one country in 1975 to over 300 institutions, operating in more than 75 courtiers in the Middle East, south East Asia, Europe and United States. Total assets of Islamic banks worldwide are estimated to bet $250 billion, and are expected to grow by 15% a year (Čihák and Hesse, 2008).The success of Islamic bank is a result of many factors, but the important one is corporate governance. The following section describes the efficiency of corporate governance and its impact on the financial performance of the Islamic banks in Indonesia. According to the agency theory, the directors act as the agent on behalf of the principles (Jensen and Meckling, 1976). The investors or owners are the principal with the goal to maximize profit. This condition may raise the agency problems because of the different interests and goal between the two parties.
2.1.2 Positive accounting theory.
Positive accounting is the branch of academic accounting research that seeks to explain and predict actual accounting practices. This contrasts with normative accounting, that seeks to derive and prescribe "optimal" accounting standards.(Kabir, 2011)
Motivation in line with the debt covenants hypothesis in a positive accounting theory the closer a company to breach debt agreement then the manager will tend to choose accounting methods that can "move" the current period income so as to reduce the possibility of the company suffered a breach of contract.
2.2 Hypothesis development.
Asset quality depends on the quality of credit evaluation, monitoring and collection within each bank, and could be improved by collateralizing the loans, having adequate provisions against potential losses, or avoiding asset concentration on one geographical or economic sector5. Meanwhile, any analysis of asset quality needs to take into account indicators of the likelihood of borrowers to repay their loans. It is particularly important to monitor whether the increase in indebtedness in the economy is concentrated in sectors that are vulnerable to shifts in economic activity.(Hassan & Bashir, 2005) Therefore, the null and alternative hypotheses are stated as:
H01: There is no significant relationship between Capital and Islamic banks profitability.
In perhaps a pioneering empirical study on Islamic banks, ˇCihák and Hesse (2010) favor small Islamic banks as opposed to big Islamic banks on the basis of the Z-score measure of bank soundness. Since then, increasing number of studies have examined the Islamic banking system as a viable alternative to the existing conventional banking system by comparing their relative efficiency, performance, risk and stability. Therefore, the null and alternative hypotheses are stated as:
H02: There is no significant different between operating Efficiency and Islamic banks profitability.