Do service activity impact on the risk of Indonesian banking industry?

Department of Islamic Banking and Finance, Bandung State Polytechnic, Bandung, Indonesia

^* Corresponding author: yona.friantina@gmail.com

Abstract

The Indonesian banking industry has developed technology innovation will provide financial services to generate income. The purpose of this paper is to compare the service activity and to explore the effect of the service activity on risk in Islamic and conventional banks. By analyzing 12 Islamic banks and 38 conventional banks in Indonesia during the period from 2015 to 2017, we use Structural Equation Modelling (SEM) with path analysis and multiple group analysis. The result shows that the service activity of Islamic banks appears to be more variable than conventional banks. The risk level of Islamic banks is more stable than conventional banks. For Islamic banks, non-financing income has a significant negative effect on risk, commission income and trading income have a significant positive effect on risk, and other non-financing income has no effect on risk. However, no significant effect has been observed between non-interest income, commission income, trading income, other non-interest income and risk level in conventional banks. This finding indicates that the combination of funding activities, lending activities, and service activities allows Islamic banks to obtain the diversification income till reduce risks. For conventional banks, diversification in activities contributes to the higher volatility of bank revenue.