CREDIT RISK IN ISLAMIC BANKING: AN IN-DEPTH ANALYSIS OF CREDIT RISK MANAGEMENT AND RISK-SHARING MECHANISMS IN INDONESIAN ISLAMIC FINANCIAL INSTITUTIONS

Authors

  • Alfiana Alfiana Universitas Muhammadiyah Bandung, Indonesia
  • Sulistyo Budi Utomo Sekolah Tinggi Ilmu Ekonomi Indonesia Surabaya, Indonesia
  • Muhammad Syafri Universitas Negeri Makassar, Indonesia
  • Al- Amin Universitas Islam Negeri Sjech M. Djamil Djambek Bukittinggi, Indonesia
  • Azmi Syarif Sekolah Tinggi Ilmu Ekonomi dan Bisnis Islam Al Azhar Bukittinggi, Indonesia

Keywords:

Islamic Banking, Credit Risk Management, Risk-Sharing Mechanisms, Sharia Compliance, Indonesian Financial Institutions, Profit-and-Loss Sharing (PLS), Regulatory Framework.

Abstract

This research extensively examines credit risk management within the unique realm of Islamic banking institutions operating in Indonesia. Islamic finance, guided by principles of ethical finance and profit-and-loss sharing (PLS) contracts, introduces distinctive complexities into the credit risk domain. The primary objective is to scrutinize the intricacies of credit risk management in Islamic banking, particularly in the Indonesian context, a significant hub for Islamic finance. The study dissects several complex dimensions: It delves into the profound intricacies of risk-sharing mechanisms inherent in Islamic finance. The research explores how profit-and-loss sharing contracts, like Mudarabah and Musharakah, reshape credit risk dynamics and the distribution of risk between financial institutions and clients. Additionally, the research investigates the unique collateralization methods in Islamic banking, compliant with Sharia principles, and their impact on credit risk and recovery processes following default. A detailed analysis of diverse contractual structures used in Islamic finance, including Ijarah and Murabahah, assesses their influence on credit risk profiles and risk mitigation strategies. Moreover, the study examines the regulatory framework governing Islamic finance in Indonesia, considering how regulators harmonize Islamic financial principles with the imperative of maintaining financial stability. The complexities of default management and recovery procedures in Islamic finance are also explored, encompassing debt restructuring, arbitration, and Sharia-compliant debt recovery mechanisms. This research combines quantitative analysis and qualitative investigation to understand Indonesian Islamic banking comprehensively. The findings offer valuable insights into the intricate landscape of credit risk within Islamic finance, with broader implications for the global industry.

References

Abdul-Rahman, A., & Nor, S. M. (2016). Challenges of profit-and-loss sharing financing in Malaysian Islamic banking. Geografia, 12(2).

Ahmed, E. R., Islam, A., Zuqibeh, A., & Alabdullah, T. T. Y. (2014). Risks management in Islamic financial instruments. Advances in Environmental Biology, 402-406.

Al‐Turjman, F., Zahmatkesh, H., & Shahroze, R. (2022). An overview of security and privacy in smart cities' IoT communications. Transactions on Emerging Telecommunications Technologies, 33(3), e3677.

Aulia, M., Yustiardhi, A. F., & Permatasari, R. O. (2020). An overview of Indonesian regulatory framework on Islamic financial technology (fintech). Jurnal Ekonomi & Keuangan Islam, 64-75.

Bianco, G. (2013). The Bitter End of Sovereign Debt Restructurings: The Abaclat v. Argentina Arbitration and the Eurozone Crisis. Legal Issues of Economic Integration, 40(4).

Biancone, P. P., Secinaro, S., & Kamal, M. (2019). Crowdfunding and Fintech: business model sharia compliant. European Journal of Islamic Finance, (12).

Bouwman, H., Heikkilä, J., Heikkilä, M., Leopold, C., & Haaker, T. (2018). Achieving agility using business model stress testing. Electronic Markets, 28, 149-162.

Brown, K., & Moles, P. (2014). Credit risk management. K. Brown & P. Moles, Credit Risk Management, 16.

Bryde, D., Broquetas, M., & Volm, J. M. (2013). The project benefits of building information modelling (BIM). International journal of project management, 31(7), 971-980.

Bushman, R., Gao, J., Martin, X., & Pacelli, J. (2021). The influence of loan officers on loan contract design and performance. Journal of Accounting and Economics, 71(2-3), 101384.

Cevik, S., & Charap, J. (2015). The behavior of conventional and Islamic bank deposit returns in Malaysia and Turkey. International Journal of Economics and Financial Issues, 5(1), 111-124.

Dikko, M. (2014). An analysis of issues in takaful (Islamic insurance). European Journal of Business and Management, 6(15), 1-5.

Dorfleitner, G., Oswald, E. M., & Zhang, R. (2021). From credit risk to social impact: On the funding determinants in interest-free peer-to-peer lending. Journal of Business Ethics, 170, 375-400.

Duarte, J., Siegel, S., & Young, L. (2012). Trust and credit: The role of appearance in peer-to-peer lending. The Review of Financial Studies, 25(8), 2455-2484.

Hanieh, A. (2020). New geographies of financial power: global Islamic finance and the Gulf. Third World Quarterly, 41(3), 525-546.

Qian, Xuanyu, Wei Jiang, and M. Jamal Deen. "Enhanced Photon Detection Probability Model for Single-Photon Avalanche Diodes in TCAD with Machine Learning." 2022 IEEE International IOT, Electronics and Mechatronics Conference (IEMTRONICS). IEEE, 2022.

Harris, T. (2013). Quantitative credit risk assessment using support vector machines: Broad versus Narrow default definitions. Expert Systems with Applications, 40(11), 4404-4413.

Ibrahim, M. H., & Alam, N. (2018). Islamic economics and Islamic finance in the world economy. The World Economy, 41(3), 668-673.

Ibtissem, B., & Bouri, A. (2013). Credit risk management in microfinance: The conceptual framework. ACRN Journal of Finance and Risk Perspectives, 2(1), 9-24.

Ibtissem, B., & Bouri, A. (2013). Credit risk management in microfinance: The conceptual framework. ACRN Journal of Finance and Risk Perspectives, 2(1), 9-24.

Izhar, H. (2010). Identifying operational risk exposures in Islamic banking. Kyoto Bulletin of Islamic Area Studies, 3(2), 17-53.

Jiménez-Arroyo, N. (2023). Islamic Finance in Spain: Growth Opportunities and its Potential Impact on Sociological Aspects of Islam. Available at SSRN 4537580.

Kelly, M., Dowling, M., & Millar, M. (2018). The search for understanding: The role of paradigms. Nurse researcher, 25(4), 9-13.

Leuwol, F. S., Hermansyah, S., Wasik, A., Amin, H., & Alam, S. N. (2023). ADAPTIVE AI FRAMEWORK FOR DYNAMIC SHARIA COMPLIANCE IN INDONESIAN ISLAMIC FINANCE: AN ETHICAL AND RELIGIOUS PERSPECTIVE. INTERNATIONAL JOURNAL OF HUMANITIES, SOCIAL SCIENCES AND BUSINESS (INJOSS), 2(3), 637-654.

McDonald, S., Gan, B. C., Fraser, S. S., Oke, A., & Anderson, A. R. (2015). A review of research methods in entrepreneurship 1985-2013. International Journal of Entrepreneurial Behavior & Research, 21(3), 291-315.

Nabi, G., Islam, A., Bakar, R., & Nabi, R. (2017). Islamic microfinance as a tool of financial inclusion in Bangladesh. Journal of Islamic Economics, Banking and Finance, 113(6218), 1-28.

Nor, A. M., & Ismail, S. (2020). Profit and Loss Sharing (PLS) and Non-PLS Financing in Malaysia: Which One Should Be the One?. KnE Social Sciences, 14-25.

Nugroho, S. P., & Trinugroho, I. (2023, July). Does Loan Restructuring Play a Role in Increasing Credit Risk of Rural Banks during Covid-19 Pandemic?. In International Students Conference On Accounting and Business (ISCOAB) (Vol. 2, No. 1).

Potekhina, A., & Riumkin, I. (2017). Blockchain–a new accounting paradigm: Implications for credit risk management.

Powell, M. A., Fitzgerald, R. M., Taylor, N., & Graham, A. (2012). International literature review: Ethical issues in undertaking research with children and young people. Childwatch International Research Network.

Pratami, A., Afandi, A., Sriyana, J., & Feriyanto, N. (2023). The Role of Financing Models and Credit Risk on Islamic Bank Stability. Cuadernos de Economía, 46(131), 43-53.

Prijadi, R., Wulandari, P., Desiana, P. M., Pinagara, F. A., & Novita, M. (2020). Financing needs of micro-enterprises along their evolution. International Journal of Ethics and Systems, 36(2), 263-284.

Ranney, M. L., Meisel, Z. F., Choo, E. K., Garro, A. C., Sasson, C., & Morrow Guthrie, K. (2015). Interview‐based qualitative research in emergency care part II: Data collection, analysis and results reporting. Academic Emergency Medicine, 22(9), 1103-1112.

Saleem, A., Daragmeh, A., Zahid, R. A., & Sági, J. (2023). Financial intermediation through risk sharing vs non-risk sharing contracts, role of credit risk, and sustainable production: evidence from leading countries in Islamic finance. Environment, Development and Sustainability, 1-31.

Salman, A., & Nawaz, H. (2018). Islamic financial system and conventional banking: A comparison. Arab economic and business journal, 13(2), 155-167.

Scannella, E., & Polizzi, S. (2021). How to measure bank credit risk disclosure? Testing a new methodological approach based on the content analysis framework. Journal of Banking Regulation, 22, 73-95.

Starosta, W. (2021). Loss given default decomposition using mixture distributions of in-default events. European Journal of Operational Research, 292(3), 1187-1199.

Stout, N. (2016). # Indebted: disciplining the moral valence of mortgage debt online. Cultural Anthropology, 31(1), 82-106.

Sutton, J., & Austin, Z. (2015). Qualitative research: Data collection, analysis, and management. The Canadian journal of hospital pharmacy, 68(3), 226.

Tiran, M. (2023). Islamic Economics: Principles and Applications in Contemporary Finance. International Journal of Science and Society, 5(3), 180-188.

Wahyudi, I., Rosmanita, F., Prasetyo, M. B., & Putri, N. I. S. (2015). Risk management for Islamic banks: Recent developments from Asia and the Middle East.

Yustiardhi, A. F., Diniyya, A. A., Faiz, F. A. A., Subri, N. S., & Kurnia, Z. N. (2020). Issues and challenges of the application of Mudarabah and Musharakah in Islamic bank financing products. Journal of Islamic Finance, 9(2), 26-41.

Zulkhibri, M., & Manap, T. A. A. (Eds.). (2019). Islamic finance, risk-sharing and macroeconomic stability. Springer International Publishing.

Downloads

Published

2023-10-12

How to Cite

Alfiana , A. ., Budi Utomo, S. ., Syafri, M. ., Amin, A.-., & Syarif, A. . (2023). CREDIT RISK IN ISLAMIC BANKING: AN IN-DEPTH ANALYSIS OF CREDIT RISK MANAGEMENT AND RISK-SHARING MECHANISMS IN INDONESIAN ISLAMIC FINANCIAL INSTITUTIONS. International Journal Of Humanities, Social Sciences And Business (INJOSS), 3(1), 95–109. Retrieved from https://www.injoss.org/index.php/joss/article/view/111

Issue

Section

Articles

Most read articles by the same author(s)