SECTORAL CONCENTRATION AND FINANCING RISK OF ISLAMIC BANKS IN INDONESIA

Abstract

This paper examines the impact of sectoral diversification in various economic sectors on the financing risks of Indonesian Islamic banks.   The study includes specific bank variables and economic macro conditions that influence financing risks, such as assets, financing, efficiency, inflation, and COVID.    Islamic Banks are divided into two banks, namely Islamic bank windows and Islamic commercial banks. This research uses aggregate data from the Islamic bank windows dan Islamic commercial banks. The monthly data spanning from January 2015 to December 2023 is used. This study employs the Autoregressive Distributed Lag Model (ARDL). Our findings document that concentrated sectoral financing leads to high financing default for Islamic bank windows and Islamic commercial banks.  The study also highlights that bank size and operating efficiency certainly reduce financing defaults, but high financing increases high risk. Inflation and COVID deteriorate financing defaults for Islamic bank windows. Practical implication suggests that financing default can be lessened through less concentrated sectoral financing and must be balanced with strict financing monitoring.