Measuring the Stability of Islamic Banks in Indonesia
A Multidimensional Approach
Teguh Santoso, Ari Tjahjawandita, and Achmad Kemal Hidayat
Center for Economics and Development Studies, Department of Economics Universitas Padjadjaran
Keywords: Stability, Q-Index, Islamic Banks, Panel Data.
Abstract: Islamic banks are characterized by the compliance to Islamic laws and practices, the main ones
being the prohibition of interest, loan trading and derivative. Globally, during 2008-2009 financial
crisis, when a large number of conventional have announced insolvency, no single Islamic bank
has been reported. Therefore, a method of measurement the stability of Indonesian Islamic banks
is required. This paper has three goals, the first is to measure Indonesian Islamic bank’s stability.
The second is to compare the stability between the large bank and the small one. The last, is to see
the factors that influence the stability. In this study, Q-Index will be utilized to measure of Islamic
banks stability. This index has a flexibility in determining the value of index itself which taking
account for dimension of pressure, efficiency, and intermediation. The data sample in this study
include 10 Indonesian Islamic banks. Based on the amount of bank asset, there are 5 large Islamic
banks and 5 the small one. The result of Q-Index has shown that 8 banks out of 10 banks had
experienced period of crisis (unstable). Using test equality of mean that the large Islamic banks
are less stable than the small one. Some indicators econometrically can explain stability of Islamic
banks, there are ratio financing to asset, cost to income ratio, non-performing financing, return on
asset and capital adequacy ratio. However, the findings impact of capital adequacy ratio necessary
further study due to no deal with economics and financial concept.
1 INTRODUCTION
Ever since Islamic banks has taken much higher
market share in the world, governments, financial
institutions agents, depositors, and debtors has
started the importance of its role in financial system.
Previous studies also have showed that Islamic
banks has a relatively stable financial condition
compare to their old brother, conventional bank.
They have experience an 8% higher loan to deposit
ratio, 2.2% lower of non-performing loan, and 2.9%
higher of capital adequacy ratio. In periods of crisis,
Islamic banks also tend to have a better stability
condition (Demirgüç-Kunt and Detragiache, 2005;
Cihák et al., 2012).
The most common characteristic that distinguish
Islamic banks and conventional is the exist of
interest. Islam banks which following Islam laws
avoid all of transaction which contain interest, but
replacing them by profit or loss sharing and goods
services trading (Siddiqi, 2000). Sharia-compliant
finance does not allow for the charging of interest
payments (riba) as only goods and services are
allowed to carry a price. On the other hand, Sharia-
compliant finance relies on the idea of profit-, loss-,
and risk-sharing, on both the liability and asset side.
In practice, however, Islamic scholars have
developed products that resemble conventional
banking products, replacing interest rate payments
and discounting with fees and contingent payment
structures. In addition, leasing-like products are
popular among Islamic banks, as they are directly
linked to real-sector transaction (Thorsten, Beck;
Asli, Demirguc-Kunt & Ourda, 2013)
In Indonesia, a dual banking system which
incorporates conventional and Islamic banks
services has been established since Act No. 7 Year
1992 about Banks and more specifically Act No. 21
Year 2008 about Islamic Banks have open-up
possibility for public banks and private banks to
expand their market to Indonesian people which in
general holds Islam as their religion. Even though
the system has reached 25 years old, yet the role and
the market share of Islamic banks has not been
increased significantly. This phenomenon also
Santoso, T., Tjahjawandita, A. and Hidayat, A.
Measuring the Stability of Islamic Banks in Indonesia - A Multidimensional Approach.
In Proceedings of the 1st International Conference on Islamic Economics, Business, and Philanthropy (ICIEBP 2017) - Transforming Islamic Economy and Societies, pages 187-192
ISBN: 978-989-758-315-5
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
187

reflected by their financial stability. Previous
research (Slamet and Mardani, 2015; Santoso et al.,
2016) have shown that financial stability of Islamic
banks in Indonesia is not as stable as conventional
banks. These studies have compared the two-
banking system using Z-score which is a common
practice ever since Altman introduce it (Altman,
1968). The weakness
A relatively more flexible methodology is by
using Q-index which also incorporates
multidimensional magnitudes. This index has a
flexibility in determining the value of index itself
which taking account for dimension of pressure,
efficiency, and intermediation. In each of these
dimensions included some factors that determine the
index value of each dimensions. Not only it has
flexibility in including dimensions and their factors,
but also flexible in determining the weights for its
dimensions and factors, specifically unique because
this index is considering a unique financial condition
for each bank and the macroeconomic condition
where they are belonging. By evaluating each
dimension and their contributing factors, this index
could be more useful for the bank itself, regulators
(central banks, financial institutions supervision
body, and deposit insurance institutions). This index
would give a detail insight the source of instability
for a bank, a group of banks (conventional or
Islamic), and banking system as a whole. A better
policy could be implemented to enhance banks
stability.
Q-index is used previously to measure
Indonesia’s financial stability which consist banking
sectors and financial sectors (Gunadi et al., 2013). It
has not been used to compare conventional banks
with Islamic banks, and individual banks one on
another. In this study, we will do two steps of
analysis. The first, we will calculate Q-index score
to get the stability score of Islamic banks and the
second, econometric model will be employed to
analysis the factors affecting stability of Islamic
banks.
2 LITERATURE REVIEW
Schinasi (2004) defined financial stability in terms
of financial system ability to facilitate and enhance
economic processes, manage risks, and absorb
shocks. Moreover, financial stability is considered a
continuum: changeable over time and consistent
with multiple combinations of the constituent
elements of finance. A financial system is in a range
of stability whenever it is capable of facilitating
(rather than impeding) the performance of an
economy, and of dissipating financial imbalances
that arise endogenously or as a result of significant
adverse and unanticipated events.
In Indonesia, banking sector have larger portion
in the financial system. Therefore, financial stability
requires a soundness of banking sector. Indonesia
implement dual banking sector, there are
conventional banks and Islamic banks. Karim, et al
(2016) studied the relation between macroeconomic
indicators and bank stability. The bank stability
measured with Z-Score. After getting z-score,
regression model employed to measure the relation
between bank stability and macroeconomic
indicator, i.e. Gross Domestic Product (GDP) in US
dollar, Interest rates (IR) in percentage and
Consumer Price Index (CPI). The empirical findings
suggest long run relationship between the stability of
commercial banks and macroeconomic factors.
The findings also suggest the long run
relationship between the stability of overall banking
industry and macroeconomic factors. However, there
is no evidence of long run relationship between the
stability of Islamic banks and macroeconomics
factors. Z-score used broadly to measure stability of
banks, however z-score only capture the risk of
banks in proxy with standard deviation of return on
asset (ROA).
Gunadi, et al (2011, 2013), develop financial
stability measurement called Q-Index. Q-index was
composite model, which capture some variables
from banking sector and financial market. Stability
for banking sector constructing for 3 indexes, there
are pressure index, intermediation index and
efficiency index. For each index, have several
variables weighted with Turning Point Analysis
(TPA) Method.
3 METHODOLOGY
In this study we have three methods, the first we will
calculate stability index of Islamic banks using Q-
Index, the second we will be conducting test equality
of mean to measure the difference of stability
between the large Islamic banks and the small one,
and in the last, we will employ the panel
econometric model. Sources of data of this research
are secondary data, that would be collected from
Bank Indonesia, Indonesian Financial Service
Authority, and bought from private research
institution that has collected financial data of
Indonesian banks. The data is in quarterly data and
has a time frame from 2006 to 2016 that would
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cover 10 Islamic banks which operates in Indonesia.
The sample of banks are Mualamat Bank, Bank
Syariah Mandiri, Bank BNI Syariah, Bank Mega
Syariah, Bank BCA Syariah, Bank BRI Syariah,
Bank, BTPN Syariah, Bank Panin Syariah, Bank
Bukopin Syariah, Bank BTPN Syariah, Maybank
Syariah
To measure stability index of Islamic Banks, we
use Q-Index, developed by Gunadi et al (2013).
Follow Gunadi et al (2013), the formula to calculate
Q-index is:
(1)
where Q-index is a linear combination of the
dimension of pressure, efficiency, and
intermediation with each of their weights (0.6, 0.2,
and 0.2 respectively). The higher the value of the
index the worse the stability condition for a
bank/group of banks.
Each dimension is calculated using the following
formulas:
(2)
(3)
(4)
Where NPF (Non-Performing Financing), CAR,
ROA, and the change of the difference between
liquid instrument and the ratio of required reserve to
total asset are factors of pressure dimension. NII
(Net Interest Income), BOPO (ratio of operating cost
to income), CIR (cost of income ratio), and the ratio
of overhead cost to operational income are factors of
efficiency dimension. Interest margin, Gap of loan to
deposit ratio (LDR) (disincentive rate for having an
LDR less than 78% or higher than 90%), and the gap
of loan to GDP relative to its long run equilibrium
are factors for intermediation dimension. The signs
of all factors reflect their influence on each
dimension index.
Q-index for each group (conventional and
Islamic) is calculated by grouping banks base on
their asset. Banks with asset larger or equal to
IDR13,348,000 are categorized as large banks.
Banks with asset lower than that are categorized as
small banks. The average of index of each
dimension from banks in each group are used to
calculate Q-index for each group (Cihák and Hesse,
2008).
After the Q-index for each bank for each group
banks are calculated, they are being compared using
descriptive statistics methods and using two-sample
statistical test to test whether the average of the two
indices of conventional and Islamic banks are
significantly different. The value of the Q-index
could be categorized into the following conditions:
Table 1: Stability Condition.
Index
Stability Condition
0 – 1.3
Good
1.3 – 1.7
Normal
1.7 – 2.0
Vigilant
2.0 – 4.0
Crisis
This research also would investigate the stability
condition in periods of crisis that taking account for
domestic crisis of oil price crisis in 2008, global
financial crisis that happened in fourth quarter of
2007 until fourth quarter of 2009, and European
crisis in early 2011. This method would expect a
higher instability stability condition, followed by
deeper investigation trough the dimensions and
factors that show some spikes in those periods.
The econometric model we used in this study is
fixed effect model to analysis the factors affecting
Islamic banks stability, with the specification bellow
(5)
Where the dependent variable is Q-Index
(stability of Islamic banks. All of the independent
variable reflects industry variable for all banks.
There is growth of total asset for bank i at time t,
credit to asset ratio (RCA) for bank i at time t, cost
to income ratio (CIR) for bank i at time t, Non-
Performing Financing (NPF) bank i at time t, ROA
(Return on Asset) bank i at time t and Capital
Adequacy Ratio (CAR). RFA is percentage of total
financing to total asset of each bank. For Islamic
banks, financing activity refers to lending with the
Murobahah and Mudharobah scheme. CIR is
percentage of total operational cost to total
operational income. NPF is percentage of
nonperforming financing total financing. ROA is
percentage of net profit to total asset and CAR is
ratio core capital to risk-weighted asset (market risk,
operating risk and financing risk)
Measuring the Stability of Islamic Banks in Indonesia - A Multidimensional Approach
189

4 RESULTS AND ANALYSIS
Among Islamic banks, 8 banks out of 10 banks had
experienced periods of crisis. Those banks are: Bank
Mandiri Syariah, Bank BNI Syariah, Maybank
Syariah, BRI Syariah, Panin Syariah, BCA Syariah,
BTPN Syariah, Bukopin Interestingly, these banks
experienced it long before periods of global financial
crisis. Only Maybank Syariah and Bukopin Syariah
experience periods of crisis 2008Q1-2008Q4. after
that period, none of the sharia banks other than Bank
BNI Syariah experienced a crisis. Bank BNI Syariah
has experienced crisis after the period 2013Q4 until
2016Q4. It means the source of crisis probably not
being triggered by global financial crisis, other
factor(s) could be the cause of the crisis.
These finding fit with the data, that during the
2008-2009 financial crisis, when a large number of
conventional banks around the world have
announced bankruptcy (about 140 in the USA only
according to the Federal Deposit Insurance
Corporation), no single Islamic bank failure has
been reported, so that the adoption of the PLS
system by a number of Saudi banks contributed
positively to the international financial stability
(Ghassan, Fachin and Guendoz, 2013). According to
Hassan (2006), possible explanation of this
difference may be the only partial integration of
Islamic banks in the global financial system, as
Islamic banks do not deal with derivatives and loans
sale Overall, Bank Maybank Syariah is the most
instable Islamic bank with Q-Index at 3.7, while the
most stable bank is Muamalat with lowest Q-Index
at 1.49. These results also indicate that bank
muamalat which is a pure sharia bank without
associated with the parent company (conventional
bank) tends to be more stable than the sharia bank
which is a subsidiary of conventional bank.
Figure 1: Average Q-Index Indonesia’s Islamic Banks.
Figure 1 shows that (on average) small Islamic
banks experienced crisis before global financial
crisis and even more stable after global financial
crisis. at the beginning of the global financial crisis
period, it was the large Islamic bank that experienced
crisis. Picture 1 also shows that small Islamic banks
relatively more stable than the large bank. Q-Index
tend to decrease after global financial crisis in 2008-
2010. However, the large Islamic bank keep
experienced instable either in the before crisis period
or after crisis period. This result confirmed by test
for quality of means, showing that Q-index between
large and small banks are different in the series of Q-
Index. Even the large Islamic banks looks more
stable than the small one, however, the Q-Index of
small Islamic banks relatively more volatile than the
large one. Standard deviation of small Islamic banks
is highest than the large one.
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
190

Table 2: Test Equality of Mean.
Method
df
Value
Probability
t-test
86
2.17948
0.032
Satterthwaite-Welch t-test*
47.3955
2.17948
0.0343
Anova F-test
(1, 86)
4.75013
0.032
Welch F-test*
(1, 48)
4.75013
0.0343
Source: Authors calculation.
Table 3: Standard Deviation.
Variable
Count
Mean
Std. Dev.
Of Mean
LARGE_ISLAMIC_BANKS
44
1.54476
0.10162
0.01532
SMALL_ISLAMIC_BANK
44
1.39354
0.4489
0.067674
All
88
1.46915
0.33239
0.035433
Source: Authors calculation.
After getting Q-Index score, the last step is
modelling stability index in the regression model.
Fixed effect model will have employed to find out
what the variable has a significant impact to stability
index of Islamic banks. The result of regression
model is presented below:
Equation 1: Result of Fixed Effect Panel Data Regression.
(13.95466) (1.185003) (3.234532)** (6.126688)*** (2.921228)** (6)
(4.627605) (23.44787)
R
2
= 0.783
Fixed Effects (Cross - Intercept):
_MUAMALAT--C
0.169746
_BNISYARIAH--C
0.762114
_MANDIRISYARIAH--C
-0.029147
_MEGASYARIAH--C
-0.097985
_MAYBANKSYARIAH--C
-0.212985
_BRISYARIAH--C
0.060031
_PANINSYARIAH--C
-0.199141
_BUKOPINSYARIAH--C
-0.282430
_BCASYARIAH--C
-0.231957
_BTPNSYARIAH--C
0.061754
Source: Authors Calculation
Based on the result of fixed effect model, known
that the factor significantly affecting stability of
Islamic banks are financing to asset ratio, cost to
income ratio, non-performing financing, return on
asset and capital adequacy ratio. Except capital
adequacy ratio, the sign of all variable is fit
according to concept of financial stability of banks.
Growth of asset have a negative sign to stability,
however it variable has no significant impact.
Conceptually, the greater the asset of banks, bank
banks can conduct business activities that encourage
increased profitability.
Variable return on asset shows negative relation
and have a significant impact to stability. It means,
the more profitable of banks, will lower the index or
increasing in stability. Variable cost to income ratio
have a positive sign and significant impact to
stability. These result in line with study of Santoso,
et al (2016), increasing in cost to income will higher
instability. Their study using z-score to measure
stability, which have a different direction, the higher
z-score banks will more stable. Even different in
direction, however, these found are same in meaning.
Cost to income ratio as a proxy of efficiency. The
greater cost to income ratio, banks will increasingly
inefficient. Inefficiency will lead to increased
operating costs, thereby decreasing profitability and
will result in higher stability score (unstable). Non-
Performing Financing (NPF) have a positive and
significant impact to stability. For banks, NPF are
ugly cost which can substract profitability. The
Measuring the Stability of Islamic Banks in Indonesia - A Multidimensional Approach
191

higher of NPF, profitability of banks will decrease,
so increase instability.
5 CONCLUSION
During global financial crisis, most of Islamic banks
didn’t experience crisis. Only two banks experienced
crisis, there are Maybank Syariah and Bukopin
Syariah. It means the source of crisis probably not
being triggered by global financial crisis, other
factor(s) could be the cause of the crisis. These
findings correspond with the data indicated that
during the 2008-2009 financial crisis, when a large
number of conventional banks around the world have
announced bankruptcy no single Islamic bank failure
has been reported. Small Islamic banks relatively
more stable than the larger one. Large Islamic banks
looks always experience crisis in the period before,
during and after crisis. The financial indicators that
have significant impact to Islamic banks stability are
ration financing to asset, cost to income ratio, non-
performing financing, return on asset and capital
adequacy ratio. The interesting findings and
necessary to do further study is the impact of capital
adequacy ratio to Islamic banks stability
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