Measuring cyclical behavior of Islamic and Conventional Financing : evidence from Indonesian dual banking system

الملخص EN

-A thorough analysis about the financial cycle encompassing several financial variables, most importantly including credit, from a conventional perspective has been carried out by previous studies.

These studies revealed that the composite cycle is of paramount importance to issue a proper policy.

The boom-and-bust of the cycle must be considered in order to achieve the macro prudential objective of curbing excessive credit growth and preventing the build-up of systemic risk.

To that end, in the context of the dual banking system where Islamic and conventional banks operate side by side under similar financial circumstances, it is crucial to assess whether the Islamic financing cycle behaves as its conventional counterpart.

Given the fact that most of the literature has focused on the cyclical behavior from a conventional perspective, this paper assesses the characteristics of both Islamic and conventional financing cycles.

This analysis will help in framing adequate policy implementation of macro prudential policies for the dual banking system.

Following the methodology employed by Drehmann, Borio, and Tsatsaronis (2012) in forming the common cycle, this paper concludes that Islamic banks functioning under the same environment as their conventional counterparts, appear to have a similar peak-and-trough cycle but different amplitude.

This means that macro prudential policy, particularly countercyclical capital buffer (CCB) policy is deemed crucial to be adopted in Islamic banking as set out in the Islamic Financial Services Board document, IFSB-15 (IFSB, 2013).