The Impact of Pandemic on Indonesian Conventional and Shariah Bank's Performance
Alifaira Hidayat Putri1, Wasilah2*, Zuliani Dalimunthe1
1 Universitas Indonesia, Faculty of Economics and Business, Department of Management, Indonesia
2 Universitas Indonesia, Faculty of Economics and Business, Department of Accounting, Indonesia
*Corresponding Author: [email protected] Accepted: 15 July 2022 | Published: 1 August 2022
DOI:https://doi.org/10.55057/ijaref.2022.4.2.4
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Abstract: The Covid-19 pandemic caused the government to implement a similar policy to lockdown called Large-Scale Social Restrictions. The policy was implemented in several regions in Indonesia and impacted the declining economy of the community, including in the banking sector. This study aims to analyze whether there are differences in the bank's asset quality measured by non-performing loans and the bank of profitability measured by return on assets and net interest income or margin. We also evaluate whether banks' specific factors could explain those changes. Banks specific factors in this research are operating cost, capital adequacy, and type as conventional or shariah banks. The research model was controlled by banks size as measured with the natural logarithm of banks' total assets. The data used in this study are commercial and sharia banks whose financial statements in the second quarter of 2020 are available on the OJK website. Based on the purposive sampling method with the criteria, the sample is feasible to use as many as 77 banks, consisting of 66 conventional banks and 11 shariah banks. The types of data used are secondary and cross-section data. The analytical techniques used are dependent two variables and multiple linear regression. The results showed a significant change in banks' assets quality and probability during the pandemic. However, there is not enough evidence to conclude that the decrease in assets quality and banks profitability comes from banks specific factors, despite a significant difference in banks' interest margin between conventional banks and shariah banks.
Conventional bank shows a significant negative decrease in NIM compared to shariah bank after the covid period.
Keywords: BOPO, CAR, Covid-19, Economy Shock
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1. Introduction
COVID-19 pandemic has created a U.S. (Dunbar, 2022) and global economic recession (Beck
& Keil, 2022). Specifically, lockdown measures to contain the spread of infected cases implemented in most countries create economic shock (Beck & Keil, 2022). Similar lockdown measures implemented in Indonesia are called the Large-Scale Social Restrictions (PSBB).
PSBB policy was first implemented in the capital city of Indonesia, DKI Jakarta, on April 10, 2020, and followed by other regions in Indonesia. Under this policy, some public facilities, shopping places, and tourist attraction sites are closed.
School and office activities are performed from home. During the implementation of the PSBB, all economic activities were slower, and there were massive layoffs at various companies.
Thus, in the second quarter of 2020, the economy in Indonesia contracted to minus 5.32%
(CNBC, 2020).
According to Beck & Keil (2022), the economic recession due to the pandemic and lockdown measures is different from the previous crisis. The crisis is not the result of financial sector imbalances or macroeconomic shock but due to public health shock. In Indonesia, the pandemic-drive crisis was also different from the economic and financial crises in 1997 and 2008. In the 1997 crisis, millions of the micro, small and medium enterprises (MSMEs) sector works as a safety net. The same goes for the 2008 crisis. The government was able to solve the crisis by encouraging domestic consumption. However, in the current crisis implementation PSBB (or lockdown) policy creates a sudden halt in many retail sectors (Detiknews, 2020).
Most of them are ncluding SMEs. Due to social restrictions, people are not allowed to meet, meaning that an essential economic activity is prohibited. The Coronavirus outbreak has hit production activities, causing a supply shock. The following impact is that people will lose their income and jobs, causing a demand shock.
The banking sector was affected severely by lockdown measures to the economic downturn.
However, a country's economic shock does not directly result in a drop in the supply or demand of loans. Thus, it is not clear how quickly the shock is reflected in the quality of the bank's portfolio (Beck & Keil, 2022). President Director of Bank Mandiri Taspen, Josephus K.
Triprakoso, revealed that banks' profitability or return on assets was depressed due to the Covid-19 pandemic. Meanwhile, President Director of Bank Mayora, Irfanto Oeij, revealed a decrease in bank interest income or net interest margin and increased bank non-performing or non-performing loans after the Covid-19 pandemic. (Kontan, 2020). Syihab & Dalimunthe (2021) shows how banks borrower apply for loan restructuring after the pandemic. Duan et al.
(2021) conducted research using 1,584 listed banks from 64 countries during the COVID-19 and found that the pandemic has increased banks' systemic risk across countries. Meawhile, Beck & Keil (2022) found that lockdown measures increase banks' loss provisions and non- performing loans.
This study aims to analyze s whether there has been a significant change in the quality of bank assets and the bank profitability during the Covid-19 period. Asset quality in this study will be measured using non-performing loans (NPL) of conventional banks or non-performing financing (NPF) of shariah banks. Research on shariah banks is an interesting topic, especially in Indonesia. There are many aspects of shariah banks' operations that makes is not just mimicking in conventional banks (see, Fitriasari & Dalimunthe, 2019; Hakim & Dalimunthe, 2022). Meanwhile, profitability will be measured using return on assets (ROA) and net interest margin (NIM). We used non-parametric testing in the first part of the study.
In the second part, this study also determines whether bank-specific factors affect changes in asset quality and changes in bank profitability both in conventional banks and shariah banks.
The bank-specific factors are the type of bank (conventional and sharia), operational cost (BOPO), capital adequacy (CAR), net interest margin (NIM), and NPL/NPF. We will control bank size in the analysis model, measured with a natural logarithm of banks' total assets. We use parametric testing using the multiple regression method to evaluate this part.
2. Theoretical Review
According to Siamat (2001), non-performing loans (NPL) are the quality of non-performing credit assets due to loans by debtors who fail to pay off due to external factors. Sarker (2005)
mentions several earnings measurements, such as operational efficiency and return on assets (ROA). A previous study by Ouerghi (2014) considers three measurements to assess profitability at a bank. One of them is the net interest margin.
A study conducted by Sufian and Habibulla (2010) showed that the Asian financial crisis had a significant adverse effect on Indonesian banks' profitability as measured by ROA. Li (2003) also conducted a study showing that the quality of bank assets has decreased significantly with an increase in the average value of NPL as a result of the financial crisis. Ouerghi (2014) conducted a study showing that the NIM of Sharia Banks and Conventional Banks did not differ significantly before and after the crisis. The study conducted by Qurat-ulAin (2019) showed a significant difference between the NPL of Conventional Banks and Sharia Banks.
Fajar and Umanto (2017) showed that BOPO significantly affects NPL. Rahmah and Armina (2020) showed that CAR significantly affects NPF, and FDR significantly affects NPF. Li (2003) conducted a study showing that SIZE significantly influences NPL. Kumar et al. (2016) showed that NIM significantly affects NPL.
According to a study by Haque, Tausif, and Ali (2020), in terms of ROA, the performance of conventional banks is better than Sharia banks. Said and Ali (2016) reported that CAR, NPF, and FDR have no significant effect on profitability, while BOPO has a negative effect on profitability. Karamoy and Tulung (2020) reported that NPL has a significant and negative effect on ROA, NIM has a significant and positive effect on ROA, LDR has no significant and negative effect on ROA, and BOPO has a significant and negative effect on ROA. According to a study by Chabachib et al. (2019) in Indonesian sharia banks, the independent variables that affect ROA are FDR, OER, and SIZE. Khan et al. (2017) reported that the NIM of conventional banks is significantly higher than sharia banks. Endri et al. (2020) reported that NPL has a negative and significant effect on bank NIM, while the LDR variable has a positive effect on bank NIM. CAR and BOPO ratios do not affect banking NIM. A study conducted by Isik and Belke (2017) showed that SIZE has a negative and significant effect on NIM.
3. Research methods
The data in this study used cross-section data analysis techniques with secondary data. The data in this study were obtained from the official website of the Indonesian Financial Services Authority. The sampling method used by researchers is non-probability sampling with a purposive sampling technique that takes samples based on specific criteria. The object of this study is banks whose financial statements are found on the Indonesian Financial Services Authority (OJK). Sampling on the OJK website is based on several criteria, including the categories of Sharia Commercial Banks and Conventional Commercial Banks. Data information for the second quarter of 2020 is available, and the data obtained does not have an outlier value. Then the research sample will be processed using the Microsoft Excel program and will be statistically tested using IBM SPSS Statistics 22 and EViews11 software. Of 16 banks of the total Sharia Commercial Banks on the OJK website, only 11 banks are included in this study. Likewise, from 149 banks of the total conventional commercial banks on the OJK website, only 66 banks are included in this study.
3.1. Operationalisation Variables and Hypotheses
The first question in this study was whether there was a significant change in the quality of bank assets and the level of bank profitability during the Covid-19 period. Asset quality will be measured using NPL, while profitability will be measured using ROA and NIM. These questions will be answered using a two-average difference test on the same object and are
interconnected (before and after) with α significant level of value. We propose three hypotheses such as; (a) There was a significant change in the asset quality of Sharia Commercial Banks and Conventional Commercial Banks in Indonesia during the Covid-19 period, (b) There is a significant change in the level of profitability (measured by ROA) of Sharia Commercial Banks and Conventional Commercial Banks in Indonesia during the Covid-19 period, and (c) There is a significant change in the level of profitability (measured by NIM) of Sharia Commercial Banks and Conventional Commercial Banks in Indonesia during the Covid-19 period. We conducted a non-parametric test to answer these questions.
The second research question is whether bank-specific factors affect changes in asset quality and changes in bank profitability. The bank-specific factors used in this research are the type of bank (conventional and sharia), BOPO, CAR, LDR, NIM, NPL, and SIZE. These questions will be analyzed using multiple regression parametric multiple least squares ( methods.
3.2 Variable Operations
In this study, variables are measured as follows:
• Nonperforming loan (NPL)/ Non-performing financing. This variable is measured as a percentage of total performing loans divided by total loans in the same period. Data was taken from bank NPLs in the second quarter of 2019 and the second quarter of 2020.
• Return on asset (ROA) is measured as the percentage of operating profit to total assets.
Data was taken from bank ROAs in the second quarter of 2019 and the second quarter of 2020.
• Net Interest Margin (NIM) is measured as the percentage of net interest income to interest revenue. Data was taken from (conventional banks’ NII) or (shariah banks’ NIM) in the second quarter of 2019 and the second quarter of 2020.
• Changes in NPL = (Nonperforming loanQ22019 – Nonperforming loanQ12019) and (Nonperforming loanQ22020 – Nonperforming loanQ12020)
• Changes in ROA = (Return on asset Q22019 – Return on asset Q12019) and (Return on asset
Q22020 – Return on asset Q12020)
• Changes in NIM = (Net interest margin Q22019 – Net interest margin Q12019) and (Net interest margin Q22020 – Net interest margin Q12020)
• BOPO, LDR, and CAR were generated from banks' financial reports.
• Type of bank is a dummy variable, conventional bank marked as 1 and shariah bank marked as 0 (zero).
4. Results and Discussions
4.1. Non-Parametric Test Results
We conducted paired t-test using the SPSS statistics to answer the first part of this study's research question. Are there changes in NPL, ROA, and NIM in banking during the Covid-19 Period? From the IBM SPSS Statistics 22, we found a positive sign with a p-value of 0.044 for NPL/NPF, a negative sign with a p-value of 0.001 for ROA, and a negative sign with a p-value of 0.007 for NIM. Because of the value of Sig. (2-tailed) is < 0.05 for all variables, then we accept the proposed hypothesis. This result shows a significant increase in the NPL/NPF from the second quarter of 2019 to the NPL in the second quarter of 2020. The similar finding on ROA and NIM.
Thus, we proceed with the parametric testing using a multiple regression method to evaluate whether bank-specific factors relate to banks' asset quality (NPL/NPF) and profitability (ROA and NIM) changes. Before going further, we conducted a classical assumption test for each
model (multicollinearity, heteroscedasticity, normality, and autocorrelation). The regression results are provided in Table 1.
Table 1: Variable Regression Test Results of Changes in NPL
Variable NPL/NPF ROA NIM
Coefficient (prob) Coefficient (prob) Coefficient (prob)
DBankType -0.098(0.749) -0.362 (0.24) -5.639 (0.00)
BOPO -0.002(0.742) -0.007 (0.37) -0.007 (0.68)
CAR 0.028 (0.07) -0.025 (0.10) -0.007 (0.85)
LDR -0.007 (0.25) 0.002 (0.74) -0.016 (0.27)
NIM -0.002 (0.92) -0.006 (0.84) -
NPL - -0.054 (0.30) -0.163 (0.19)
Size (LnTA) 0.093 (0.25) 0.056 (0.49) 0.185 (0.35)
R-squared 0.0372 0.065887 0.309
Prob(F-statistic) 0.462 0.181899 0.000
Source: Statistically tested results of data with EViews11 output
From the table above, the Prob (F-statistic) value in the NPL Changes study is 0.462. Thus, it can be concluded that the Types of Conventional Commercial Banks, BOPO, CAR, LDR, SIZE, and NIM, have no significant effect on Changes in NPL. The results of this study are not in line with the research conducted by Rahmah and Armina (2020), where the independent variables (bank-specific factors) in the study together have a significant effect on NPL. Then, we found similar findings for banks' profitability measured with ROA. The Prob (F-statistic) value in the ROA Changes study is 0.1819, which means there is no evidence that banks specific factors explain the changes in banks' ROA. However, there is different finding on banks' profitability measured with NIM. The Prob (F-statistic) value in the changes of NIMs 0.00000.
When we go further to each independent variable, table 1 shows that each bank's specific factor cannot explain the change in NPL/NPF, ROA, or NIM but the bank's type on NIM. The coefficient value of the dummy variable of bank type is -5.639660 with a p-value of 0.000. It means that commercial banks experienced a lower change in NIM compared to shariah banks.
Meanwhile, there is not enough evidence that there are differences in change in NPF/NLP dan ROA between conventional and shariah banks.
5. Conclusion
From non-parametric testing, we found a significant change in the value of bank asset quality as measured by NPL/NPF and bank profitability as measured by ROA and NIM in the Covid- 19 period and the previous period. The value of bank asset quality has decreased significantly during the Covid-19 period compared to the previous period. Meanwhile, we also found that the value of the bank's profitability level decreased significantly in the Covid-19 period compared to the previous period due to the decline in ROA and NIM values. However, we do not find enough evidence to conclude that bank-specific factors (BOPO, CAR, LDR, NIM) become a factor in explaining the decrease in the quality of bank assets as measured by NPL/NPF. We also do not find enough evidence to conclude that bank-specific factors (BOPO, CAR, LDR, NIM) explain the decrease in the banks' profitability as measured by ROA. A slightly different finding regarding the decrease in banks' profitability as measured by NIM.
We found that type of banks can explain the decrease in NIM, despite other banks' specific
factors (BOPO, CAR, LDR, NPL/NPF) showing no significant results. This finding indicates that the lower or banks' assets quality and profitability during the covid period are external factors.
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