COMPETITION, DIVERSIFICATION, AND STABILITY IN THE INDONESIAN BANKING SYSTEM

• Published in: Buletin Ekonomi Moneter dan Perbankan
• Main Authors: Mudeer Ahmed Khattak, Mohsin Ali, Baharom Abdul Hamid, Muhammad Umar Islam
• Format: Article
• Language: English
• Published: Bank Indonesia 2021-03-01
• Subjects: bank competition; diversification; stability; dual banking; indonesia.
• Online Access: https://www.bmeb-bi.org/index.php/BEMP/article/view/1481

We examine the impact of competition and portfolio diversification on banking stability for conventional and Islamic banks in Indonesia. We find that the Islamic banking sector is less stable, when compared to the conventional banking sector. Competition in the banking sector reduces stability, while diversification enhances it. We find that competition negatively impacts the Islamic banks, but diversification has no impact on these banks. An interesting finding is that competition and diversification complement each other in enhancing the stability of the Indonesian banking sector. These findings carry an important policy implication for the banking sector of Indonesia.