Competition, diversification, and stability in the Indonesian banking system

Abstract

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.

Keywords
Bank competition, Diversification, Stability, Dual banking, Indonesia
Citation
Khattak, Mudeer Ahmed and Abdul Hamid, Baharom and Islam, Muhammad Umar and Ali, Mohsin. (2021). Competition, diversification, and stability in the Indonesian banking system. Bulletin of Monetary Economics and Banking, Special Issue 2021, pp. 59-88.
Publisher

Bank Indonesia

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