Do Non-Traditional Activities Matter for Income Diversification and Performance of Islamic Banks in Indonesia?


Non-traditional activities are started being concerned. It is questionable whether Islamic banks follow the trend of utilizing non-traditional activities to promote income. Therefore, it is important to examine the trend and the diversification among traditional (Profit Loss Sharing (PLS) and non-PLS) and non-traditional activities by Islamic banks. This study also examines the impact of these three activities on performance and how diversification affects performance. Eleven (11) Islamic banks are tested for a period of 2010-2018. This study finds that revenue is mostly earned from non-PLS activities, non-traditional activities and the lowest one is PLS activities as PLS activities contain high risks. This study also finds that PLS and non-PLS activities affect performance. Meanwhile,non-traditional activities can not necessarily be shift of traditional activities and doesnot play a major role in performance.It can be due to only fewer instruments of non-traditional activities that are available and suitable with Islamic banks. Besides, diversification does not affect performance which indicates that diversification is not optimal yet in supporting income. This results imply in providing information for Islamic bankers about how activities can diversify the income. 

Keywords:traditional activities,non-traditional activities,IslamicBanks,diversification, performance

[1] Asutay, M., & Izhar, H. (2007). Estimating the profitability of Islamic banking: Evidence from Bank Muamalat Indonesia. Review of Islamic Economics, 11 (2), 17-29.

[2] Bahari, Z. (2009). The changes of product structure in Islamic banking: Case study of Malaysia. Paper presented at the International Conferenceon Islamic Perspective on Management and Finance,United Kingdom.

[3] Crouzille, C. M., Tacneng, R., & Tarazi, A. (2013). Is bank income diversification beneficial? Evidence from an emerging economy. HAL archives-ouvertes.

[4] DeYoung, R., & Roland,K. P.(2001).Productmix and earnings volatility at commercial banks:Evidence from a degree of total leverage model. Journal of Financial Intermediation, 10 (1), 54-84.

[5] Edwards,F.R.&Mishkin,F.S.(1995).Thedeclineoftraditionalbanking: Implications for financial stability and regulatory policy. Economic Policy Review, 1 (2), 27-45.

[6] Ferawati,R., Juanda,B., Syaukat, Y.&Bratakusumah,D.S.(2015).Domination of Murabaha financing of Islamic microfinance in developed and underdeveloped areas in Bogor regency. International Journal of Research in Social Sciences, 5 (5).

[7] Grassa, R. (2012). Islamic banks’ income structure and risk: Evidence from GCC countries. Accounting Research Journal, 25 (3), 227-241.

[8] Gurbuz, A. O., Yanik, S. & Ayturk, Y. (2013). Income diversification and bank performance: Evidence from turkish banking sector. BDDK Bankac ve Finansal Piyasalar, 7 (1).

[9] Huang, L. W., & Chen, Y. K. (2006). Does bank performance benefit from non-traditional activities? A case of non-interest incomes inTaiwan commercial banks.Asian Journal of Management and Humanity Sciences, 1 (3), 359-378.

[10] Ismail, A., Hanif, R., Choudhary, S., & Ahmad, N. (2015). Income-diversification in banking sector of Pakistan: A ‘blessing’ or ‘curse’? The Journal of Commerce, 7 (1), 11-22.

[11] Khan, M. S., & Mirakhor, A. (1987). Theoretical Studies in Islamic Banking and Finance. Houston: The Institute for Research and Islamic Studies.

[12] Lup, F. C. (2015). Income diversification and bank performance in dual banking system. Master thesis, Universiti Tunku Abdul Rahman, Malaysia.

[13] Molyneux, P., & Yip, J. (2013). Income diversification and performance of Islamic banks. Journal of Financial Management, Markets and Institutions, 1 (1), 47-66.

[14] Obaidullah, M. (2005). Islamic Financial Services. Jeddah: Islamic Economics Research Center, King Abdulaziz University.

[15] Shaban, M., Duygun, M., Anwar, M., & Akbar, B. (2014). Diversification and banks’ willingness to lend to small businesses: Evidence from Islamic and conventional banks in Indonesia. Journal of Economic Behavior Organization, 103 (Suppl.), 39-55.

[16] Shahimi, S. Bt., Ismail, A. G. B., & Ahmad, S. B. (2006). A panel data analysis of fee income activities in Islamic banks. J.KAU: Islamic Econ., 19 (2), 23-35.

[17] Teimet, P. R., Ochieng, D. O., & Away S. (2011). Income source diversifcation and financial performance of commercial banks in Kenya. International Journal of Business and Public Management, 1 (1), 26-35.

[18] Turkmen,S.Y.,&Yigit,I.(2012).Diversificationinbankinganditseffectonbanks’performance:Evidence from Turkey. American International Journal of Contemporary Research, 2 (12), 111-119.

[19] Wolfe, S., Mercieca, S., & Schaeck, K. (2007). Small European banks: Benefits from diversification? Journal of Banking & Finance, 31, 1975–1998