Credit Risk in Indonesia: Islamic Bank vs Conventional Bank

Abstract

This paper examines the credit risk inIslamic Banks compared to Conventional Banks in Indonesia. The credit risks level in each Islamic banks and Conventional Banks are expressed in terms of financial ratios, NonPerforming Financing (NPF) in Islamic Banks and Non-Performing Loan (NPL) in Conventional Banks. The data sample used in this study are published financial statements for period of 2004 – 2013. To test the hypotheses the authors classified the data into three categories based on the size of total assets, category 1 for total assetsrange of 1–10 trillion Rupiah, category 2 for total assets range of 10-50 trillion Rupiah and category 3 for range of total asstes of 50 -100 trillion Rupiah. The authors find significant differences of NPF and NPL
value in every categories. Remarkably only in category 1 that NPF outperform NPL, it indicates that the credit risk in Islamic Banks are lower than in Conventional Banks. Meanwhile for category 2 and category 3 the value of NPF are higher than NPL, it indicates that the credit risk in Islamic banks are higher than in conventional banks. The rise of credit risk in Islamic banks in category 2 and category 3 due to greater total assets managed which are significantly will expose Islamic banks to greater credit risks.

Keywords: Credit Risk, Non Performing Financing, Non Performing Loan, Islamic Banking, Conventional Banking